Published on The Prepaid Press by Arlene Hauben
Monday, August 01, 2011
The verdict on debit card swipe fees is in, but few people are cheering. Like a mother doling out lollipops to her kids, the Federal Reserve Board was short on candy for most of the key parties.
The Board agreed on a cap of 21 cents per transaction plus .05 percent (5 basis points) of the transaction. Some analysts called it a compromise, more lenient on big banks and processors than anticipated, coming in at less than the 44 cents now charged, but not as severe as the 12-cent limit the Federal Reserve Board originally proposed last December. On a $40 transaction, this represents a 48 percent cut in revenue.
The cap is on the portion of the interchange fee that an issuer can receive from a payment network, such as Visa and MasterCard.
The board also adopted an interim final rule for fraud prevention measures, allowing issuers one cent per transaction if they adopt and follow certain policies and procedures. As for routing provisions, the final rule requires that issuers put two unaffiliated networks on each card.
The final rule also upheld the exemptions for issuers with assets of less than $10 billion and certain government-administered programs and reloadable prepaid cards. Also exempt are ATM networks and three-party systems, where the same entity acts as both the network and the issuer (and often the acquirer), such as the American Express model.
The new regulations, except for interim rules, will go into effect on October 1, 2011 – a new deadline set by the Fed.
Progress or Setback?
Bank card issuers came away less scathed than projected, but consumers are not optimistic about savings being passed on, according to commentators. Credit unions and small banks said they fear that the Fed won’t be able to ensure that the exemption for institutions with assets of $10 billion or less will be protected. Merchants were complaining that the interchange fee is still too high.
David French, SVP, Government Relations, National Retail Federation, called the proposed rule “a real setback” for consumers. “It presently costs $427 a year per household embedded in the cost of goods,” French said on CNBC, June 29, reacting to the announcement.
Dan Berger, executive vice president of Government Affairs, National Association of Credit Unions, told CNBC that savings won’t revert to consumers. Rather, he suggested that the compromised fees will drive up consumer costs and hurt financial institutions, which might have to lay off more employees.
“The true cost of debit transactions is under four cents,” said Berger. “This is a weaker reform than expected.”
Prepaid Debit Cards Fees in Question
The new rule provides an exemption for prepaid debit cards, as a protection for low-income consumers, but the exemption will take time to be programmed on the POS terminals. Most prepaid card issuing banks fall into the exemption category, because they have assets of less than $10 billion.
Industry experts are saying that the legislation is likely to impact the prepaid debit card market, regardless of the exemption. One article by Daniel Wagner, Associated Press, called into question fees that prepaid debit card users might be facing.
“Under a rule to take effect in July, companies that issue debit cards must reduce the fees they charge to retailers. To recoup their lost revenue, banks that offer the cards are raising fees for people who use them,” Wagner wrote.
Wagner reported that card issuers that offer prepaid cards would lose the most during the time when payment networks won’t be ready to distinguish between debit cards.
Might this mean higher fees for prepaid debit cards during the transition period?
T. Jack Williams, president of Paymentcard Services, thinks that prepaid program managers are not incented to raise fees, nor are their issuing banks major DDA players with incentive to raise fees. “Prepaid program managers would only risk losing cardholders,” said Williams. “Also, cardholder fees are protected by state contracts in the case of governmental disbursement, and do not allow arbitrary increases.”
Steve Streit, CEO of Green Dot, said, “Green Dot feels good that the exemption was upheld by the Federal Reserve. We will obviously need to spend more time parsing the language to have any definitive comments, but we are pleased that the exemption for both GPR cards and banks under $10 billion was upheld.”
“Consumers already feel sideswiped by fees for activation and replenishment,” said Alan Mattei, managing partner, Novantas, an independent consulting firm in New York. ”Raising fees on prepaid debit cards is a sure way to trigger more Federal oversight.”
Mattei says that it will take about a year for terminals to be reprogrammed to be able to recognize the exempt and non-exempt banks, so they will know what to charge for swipes.
New Rules Could Drive Innovation
In a roundtable discussion sponsored by ACI Worldwide, a provider of electronic payments software and solutions, experts presented viewpoints and issues facing banks, retailers, merchant acquirers and card processors, all of which are impacted by the final ruling of the Durbin Amendment.
Jim Schlegel, senior product manager at ACI, thinks that government regulations could drive innovation. “Banks will increase their focus on alternate channels of profit,” said Schlegel. “They will adjust products and offerings and move into prepaid.”
“I do not see prepaid debit cards as a transactional revenue stream, but rather as a marketing vehicle to bring customers in,” said Schlegel, “It is a value proposition, not a transaction play.”
Schlegel foresees the prepaid debit card as a way for banks to convert prepaid customers into DDA depositors in order to increase capital on their balance sheets.
“The biggest issue for prepaid is probably requiring two unaffiliated networks and the proposed regulation that limits ACH,” said Lori Breitzke, president, E&S Consulting. “I believe that credit issuers will issue low-end/no feature based card programs. Debit cards will no longer offer rewards; there is just not enough income there to warrant it with float being next to nothing.”
Several ACI panelists agreed that issuers will probably strip rewards from their signature-debit programs, which will be priced the same as PIN debit but incur higher fraud costs.
How Retailers Can Benefit
Retailers can find benefits from the new rules, but they have to start looking at the payment mix: signature debit and PIN debit.
“Look at the average transaction amounts and understand the variation between PIN and signature debit,” suggested Schlegel. “Retailers wanted this legislation but need to leverage the benefits they can get by steering and prompting customers to take the cheaper payment route.”
Retailers have to ask for information from their merchant acquirers. Dan Heimann, ACI’s manager of solutions consulting, said that acquirers have to educate merchants on how to save money on rates. “Competing processors and ISOs have to work hard to educate merchants, Heimann warned. “This will lead to increased competition among merchant acquirers.”
Big merchants like Walmart will press for lower processing costs. “Mom and Pop stores have to perk up and ask for savings,” said Heimann.
Schlegel predicts a new era of “co-opetition” where merchants and banks collaborate with each other. The final rule, if it is final, may be just the push required to sell co-branded prepaid cards using business-to-business marketing in real time.
Whatever follows as a result of the amendment, history demonstrates that the market will dictate pricing. When it comes to higher fees or new fees on previously free products, the customer will have the final say. •
What are Swipe Fees?
Processors, such as Visa and MasterCard, refer to swipe fees as interchange reimbursement fees. Visa states that they use interchange reimbursement fees as transfer fees between financial institutions to balance and grow the payment system for the benefit of all participants. Merchants do not pay interchange reimbursement fees; merchants pay “merchant discount” to their financial institution. According to Visa, merchants buy a variety of processing services from financial institutions; all these services may be included in their merchant discount rate, which is typically a percentage rate per transaction.
Each time a debit card gets swiped, fees are charged by the cardholder’s bank to the retailer’s bank and passed on to the retailer. Banks say such fees are necessary to cover their operational and network costs. Merchants contend that transaction fees have become unreasonable and that they are now at a level that severely cuts into profits. Meanwhile, consumers end up paying more for goods to make up for cost of interchanges fees.